Abstract
This study investigates the degree of concordance between fifteen measures of audit quality used in academia and two measures of audit process quality determined either by audit firms’ internal inspections or by Public Company Accounting Oversight Board inspections of individual engagements. Using two confidential datasets of these assessments of audit process quality, I find that three of the measures of audit quality used by academics have significant associations with both measures of audit process deficiencies used by auditors and regulators: (i) the propensity to restate financial statements, (ii) the propensity to meet or beat the zero earnings threshold, and (iii) audit fees. Seven academic proxies are significantly associated with only one audit process quality measure, and five have insignificant associations with both practitioner assessments. Overall, the significant associations indicate that practitioners and academics share common ground in identifying low-quality audits. These findings can provide guidance for future studies in selecting audit-quality proxies suitable for different research questions.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 144-174 |
| Number of pages | 31 |
| Journal | Journal of Accounting and Economics |
| Volume | 67 |
| Issue number | 1 |
| DOIs | |
| State | Published - Feb 2019 |
Funding
This research paper, originally entitled “The validity of publicly available measures of audit quality. Evidence from the PCAOB inspection data”, was prepared while I was a Senior Economic Research Fellow at the Public Company Accounting Oversight Board (PCAOB). The PCAOB, as a matter of policy disclaims responsibility for any private publication or statement by any of its Economic Research Fellows and employees. The views expressed in this paper are mine and do not necessarily reflect the views of the Board, individual Board members, or staff of the PCAOB. I thank Michelle Hanlon (editor), Richard Frankel and Miguel Minutti‐Meza (the referees), Michael Gurbutt, Bill Kinney, Phillip Lamoreaux, Patricia Ledesma, Christian Leuz, Robert Magee, Reining Petacchi, Gil Sadka, Nemit Shroff, Fumiko Takeda (discussant), Anne Thompson (discussant), Jieying Zhang (discussant), Luigi Zingales, PCAOB staff, and seminar participants at the 2016 Auditing Section Midyear Meeting, the 2016 Financial Accounting and Reporting Section Midyear Meeting, Northwestern University, the PCAOB, the Fifth Cherry Blossom Conference at George Washington University, and the Sixth International Conference of The Japanese Accounting Review for helpful discussions on earlier versions of this work. I also thank Jonathan Cook and Saad Siddiqui for helpful discussions on how to mitigate selection bias concerns and for sharing some of their Stata code. I gratefully acknowledge generous financial support from the Kellogg School of Management and in particular the Lawrence Revsine Fellowship. This research paper, originally entitled “The validity of publicly available measures of audit quality. Evidence from the PCAOB inspection data” was prepared while I was a Senior Economic Research Fellow at the Public Company Accounting Oversight Board (PCAOB). The PCAOB, as a matter of policy disclaims responsibility for any private publication or statement by any of its Economic Research Fellows and employees. The views expressed in this paper are mine and do not necessarily reflect the views of the Board, individual Board members, or staff of the PCAOB. I thank Michelle Hanlon (editor), Richard Frankel and Miguel Minutti‐Meza (the referees), Michael Gurbutt, Bill Kinney, Phillip Lamoreaux, Patricia Ledesma, Christian Leuz, Robert Magee, Reining Petacchi, Gil Sadka, Nemit Shroff, Fumiko Takeda (discussant), Anne Thompson (discussant), Jieying Zhang (discussant), Luigi Zingales, PCAOB staff, and seminar participants at the 2016 Auditing Section Midyear Meeting, the 2016 Financial Accounting and Reporting Section Midyear Meeting, Northwestern University, the PCAOB, the Fifth Cherry Blossom Conference at George Washington University, and the Sixth International Conference of The Japanese Accounting Review for helpful discussions on earlier versions of this work. I also thank Jonathan Cook and Saad Siddiqui for helpful discussions on how to mitigate selection bias concerns and for sharing some of their Stata code. I gratefully acknowledge generous financial support from the Kellogg School of Management and in particular the Lawrence Revsine Fellowship.
Keywords
- Audit fees
- Audit process quality
- Internal inspections
- Measures of audit quality
- PCAOB inspections
- Restatements
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics